BRIEFING PAPER
Number 06852, 21 March 2016
The welfare cap
By Chris Rhodes
Inside:
1. What benefits are capped?
2. OBR assessment of welfare
spending
3. How does the cap work?
4. Public finances background to
the cap
5. Will the cap make any
difference?
6. Detailed OBR forecast of
welfare spending (at Budget
2016)
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Number 06852, 21 March 2016
Contents
Summary
3
1.
What benefits are capped?
4
2.
2.1
2.2
OBR assessment of welfare spending
Autumn Statement 2015
Budget 2016
5
5
6
3.
3.1
3.2
3.3
How does the cap work?
Setting the cap
How do we know if the cap is met?
What happens if the cap is exceeded?
7
7
7
7
4.
4.1
4.2
Public finances background to the cap
Fiscal consolidation
Control of public spending
8
8
8
5.
Will the cap make any difference?
9
6.
Detailed OBR forecast of welfare spending (at Budget 2016)
Cover page image copyright: Money UK British pound coins by hitthatswitch.
Licensed under CC BY 2.0 / image cropped.
10
2
3
The welfare cap
Summary
The welfare cap is a limit on the amount that Government can spend on certain social
security benefits in the next five years.
The Government introduced the cap in Budget 2014 1 and Office for Budget Responsibility
(OBR) first reported on whether the cap had been met or exceeded alongside the Autumn
Statement 2014.
Alongside the Spending Review/Autumn Statement 2015, the OBR announced
that the Government would breach the cap in three of the next five years.
The operation of the cap, the actions required from the Treasury and consequences if the
cap is exceeded are outlined in the Charter for Budget Responsibility. 2
This policy had been longed planed, with Budget 2011 stating that the Government was
“considering options for strengthening control” over this type of spending. 3
Welfare cap vs. the household benefit cap
The welfare cap on specified elements of social security spending is not to be confused with the
household benefit cap – introduced in 2013 – which limits total household benefits at £500 per week
for a family and £350 per week for a single person with no children (subject to certain exemptions). See
our note on The Household Benefit Cap (SN06294) for more on this.
HM Treasury, Budget 2014, 19 March 2014, para 1.76, p26
HM Treasury, Charter for budget responsibility: March 2014 update, p9
3
HM Treasury, Budget 2011, March 2011, para 1.51, p21
1
2
Number 06852, 21 March 2016
1. What benefits are capped?
Benefits within the scope of the cap and those excluded are outlined in
the following table from the Summer Budget 2015. 4
In total, the benefits included within the scope of the cap account for
56% of welfare spending in 2015/16.
4
HM Treasury, Summer Budget 2015, Table B1, p103
4
5
The welfare cap
2. OBR assessment of welfare
spending
2.1 Autumn Statement 2015
Alongside the Autumn Statement 2015, the OBR stated that relevant
welfare spending would breach the cap in 2016/17, 2017/18 and
2018/19. The OBR found that relevant spending would observe the cap
in 2019/20 and 2020/21. The OBR stated that the breaches were due to
the cancellation of proposed changes to tax credits that had been
proposed in the Summer Budget 2015.
Note that the welfare cap includes a ‘forecast margin’ which allows for
breaches of 2% when changes to forecast mean relevant welfare
spending exceeds the cap.
OBR assessment of welfare spending in cap at Autumn Statement/Spending Review 2015
Welfare cap set in Summer Budget 2015
Plus 2% forecast margin
Forecast welfare spending in cap
Cap breached or observed?
2016/17
115.2
117.5
2017/18
114.6
116.9
2018/19
114.0
116.3
2019/20
113.5
115.8
2020/21
114.9
117.2
119.2
117.7
115.9
115.3
117.1
Breached
Breached
Breached
Observed
Observed
Source: OBR, Economic and Fiscal Outlook November 2015, Table 5.3
The 2% margin can only be used for forecast-driven changes to welfare spending
The OBR assessment of performance against the cap by year is set out
below: 5
•
2016/17: Relevant welfare spending will be £4.0 billion above the
cap level and £1.7 billion above the forecast margin, so the cap is
set to be breached.
•
2017/18: Relevant welfare spending will be £3.1 billion above the
cap level and £0.8 billion above the forecast margin, so the cap is
set to be breached.
•
2018/19: Relevant welfare spending will be £1.9 billion above the
cap level but £0.4 billion below the forecast margin. However, the
OBR judges that the spending above the cap is due to policy
decisions and is not driven by forecast changes, and therefore, the
cap is set to be breached.
•
2019/20: Relevant welfare spending will be £1.8 billion above the
cap but £0.5 billion below the forecast margin. The OBR judges
that the cap is set to be observed because policy changes
actually reduce relevant spending in that year. The technical
breach of the cap is the result of classification changes.
•
2020/21: Relevant welfare spending will be £2.1 billion above the
cap level but £0.2 billion below the forecast margin. The OBR
judges that the cap will be observed because policy changes
reduce relevant welfare spending, and technical breech is again
due to classification changes.
5
OBR, Economic and Fiscal Outlook, November 2015, pp 192,193
Number 06852, 21 March 2016
If the cap is breached, the Government must debate this matter in the
House of Commons as set out in the Charter for Budget Responsibility: 6
If the welfare cap is found to be breached in one or more of the
years in which it applies, there will be a debate on a votable
motion led by the Department for Work and Pensions, normally
within 28 sitting days, giving an assessment of the reasons for the
breach. The Department for Work and Pensions will:
•
propose government policy measures which will reduce
welfare spending to within the level of the cap;
•
seek approval for the level of the welfare cap and/or
margin to be increased, along with an explanation of why
this is considered to be justified; or
•
explain why a breach of the welfare cap is considered
justified.
The following motion was debated in the House of Commons on 16
December 2015:
That, pursuant to the Charter for Budget Responsibility: Summer
Budget 2015 update, which was approved by this House on 14
October 2015, under Section 1 of the Budget Responsibility and
National Audit Act 2011, this House agrees that the breach of the
Welfare cap in 2016-17, 2017-18, and 2018-19 resulting from
the decision not to pursue proposed changes to tax credits, as laid
out in the Autumn Statement 2015, is justified and that no
further debate will be required in relation to this specific breach. 7
2.2 Budget 2016
Alongside Budget 2016, the OBR provided new forecasts of spending
within the cap. These showed that upward revisions to the cost of
disability benefits would push relevant welfare spending up in
each year of the forecast period. This means that the cap and the
forecast margin would be breached in every year from 2016/17 to
2020/21. 8
(It should be noted that this is not the OBR’s formal assessment of
welfare spending, which is published alongside the Autumn Statement
each year).
The OBR also noted the following about forecast welfare spending
between 2015/16 and 2020/21: 9
•
•
•
Total welfare spending is forecast to increase by 5.9%
Spending on items subject to the cap (predominantly working-age
welfare spending) is projected to fall by 1.9%
Spending on items outside the cap (largely state pensions) is expected to
rise by 15.7%
Budget 2016 stated the Government intention “for the cap to be met
by the end of the Parliament when the OBR conducts its next
assessment at Autumn Statement 2016.” 10
HM Treasury, Charter for Budget Responsibility, December 2014, para 3.30, p10
HC Deb 16 December 2015 c1633
8
OBR, Economic and Fiscal Outlook, March 2016, para 1.11
9
Ibid, para 4.104
10
HM Treasury, Budget 2016, March 2016, para 1.70
6
7
6
7
The welfare cap
3. How does the cap work?
3.1 Setting the cap
The level of the cap and the benefits which fall within its scope are set
by the Treasury. These will normally be set out at or before the first
Budget of each Parliament.
The cap is set for a five year period. The Treasury will set the cap for an
additional year each time the forecast period is extended, so that a five
year period is always covered.
The Treasury will seek the approval of the House of Commons for any
changes to the benefits which fall within the cap’s scope.
3.2 How do we know if the cap is met?
The cap is a limit on the amount that is forecast to be spent, not the
actual amount spent.
At the time of each Autumn Statement, the Treasury will report
whether OBR forecasts of relevant spending are set to meet or exceed
the level of the cap for each year to which the cap applies.
If the forecasts are higher than the cap for any of the years to which the
cap applies, then the cap will be judged to have been exceeded.
So, in the Autumn Statement 2014, the OBR published forecasts of
expenditure in 2015/16 and subsequent years, revealing whether
relevant spending comes in under or exceeds the level set out in the
table above.
If spending within the scope of the cap is forecast to be above the level
of the cap but within a pre-set margin (currently set at 2% above the
cap level), and this is due to forecast changes rather than discretionary
policy action, then the cap is not deemed to be breached. The OBR will
assess whether any breach is due to forecast changes or policy action.
3.3 What happens if the cap is exceeded?
If the cap is judged to have been exceeded, then the Government must:
•
•
•
Propose policy measures to reduce welfare spending
Seek approval for the cap level to be increased
Explain why a breach of the cap is justified.
A votable motion must be introduced to the House of Commons within
28 sitting days seeking approval for these actions. The debate will be led
by the Department for Work and Pensions.
Number 06852, 21 March 2016
4. Public finances background to
the cap
Beyond the political arguments for capping spending on welfare, there
are fiscal and economic reasons which motivated the Government to
introduce this cap.
4.1 Fiscal consolidation
The Government is committed to reducing the amount that the
Government must borrow each year to zero: a budget surplus. The OBR
forecasts that this will be achieved in 2019/20. 11
In order to reach this surplus, the Government has set out plans for
‘fiscal consolidation’ which require a combination of both spending
reductions and tax rises. The current proposals are for 80% of the
consolidation to be funded through reductions in spending, with the
remaining 20% funded through tax rises. 12
This means that controlling spending across Government is a high
priority and the cap on welfare spending is one measure that the
Government is taking in order to achieve this.
4.2 Control of public spending
Government spending is classified as either Departmental Expenditure
Limits (DEL) or Annually Managed Expenditure (AME):
•
•
DEL is spending which departments have direct control over and
includes most elements of predictable spending, such as teacher’s
salaries, or money used to fund most policy programmes.
AME is the less predictable elements of expenditure, such as
spending on debt interest and spending on social security. All of
the spending within the scope of the welfare cap is classified as
AME.
Historically, DEL has accounted for a greater proportion of public
spending than AME. In recent years this has been reversed and in
2015/16, AME is forecast to account for 53% of total spending, rising
to 55% by 2020/21.
DEL spending has fallen in recent years and forecasts suggest that this
pattern will continue. However, current AME spending is forecast to rise
over the same period in real terms.
By setting a cap on a significant portion of AME spending it is hoped
that it will be easier to control AME spending more easily in the future.
11
12
OBR, Economic and fiscal outlook, July 2015
Budget 2014, Table 1.2, p20
8
9
The welfare cap
5. Will the cap make any
difference?
The welfare cap is set at the level of spending on relevant benefits as
forecast by the OBR. So, in order for the cap to be met, spending must
simply remain at or below its expected level. This has led some
commentators to argue that the cap has “no policy effect.” 13
However, the Institute for Fiscal Studies (IFS) disputes this and has stated
that “the cap could reduce future downside risks to public finances.” 14
The IFS state that the economic deterioration in 2011/12 increased
forecast welfare spending in 2015/16 more than 2% above the level
previously forecast. This suggests that another economic deterioration
on the scale seen in 2011/12 could lead to the cap as it is currently
designed triggering Government action.
Another point to note is that the cap increases scrutiny of the relevant
parts of the welfare budget, meaning that there is more of an incentive
for Governments to seek to control these budgets.
G Cooke, “The coalition’s welfare cap puts politics before policy”, New Statesman
[online], 19 March 2014
14
G Tatlow, “Economy bouncing back more strongly but policy choices have increased
long-run risks to the public finances”, presentation at IFS Budget 2014 briefing, 20
March 2014
13
Number 06852, 21 March 2016 10
6. Detailed OBR forecast of
welfare spending (at Budget
2016)
Source: OBR, Economic and Fiscal Outlook, March 2016, Table 4.22
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BRIEFING PAPER
Number 06852, 21 March
2016
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